Ernst & Young Executive Gives Perspective on
Current Landscape of Accountancy, Post Sarbanes-Oxley
Cook discussed the practical impact of the 2002 Sabanes-Oxley (S-O)
legislation in a presentation to accountancy students in early March.
Cook is global director of retail and consumer products and director of
industries for Ernst & Young (E&Y), one of the Big Four accounting
firms. His talk paralleled information provided in a comprehensive Ernst
& Young brochure about the legislation.
Cook started his presentation with a review of the six key areas included
in Sarbanes: disclosure, roles, conduct, enforcement, penalties, and relationships.
He focused his comments on those sections of the act that are having the
most significant impact in the early years of enforcement.
More Active CEOs
Section 302, which deals with management certifications, has significantly
increased CEO involvement in financial oversight. Because the quarterly
and annual financial statements required by the section are not "stand-alone
events," the work and supporting systems required to fulfill the
legislative requirements are being integrated into routine business performance
reporting and financial reporting processes. CEOs are increasing their
involvement in financial reporting processes, and they are sending a strong
message about accountability and responsibility across the organization.
"Accountability is moving down into organizations, driving dialog
and increased correspondence," Cook noted.
One goal of the S-O legislation was to increase the frequency and quality
of communication within companies. Although the section 302 management
certification applies to the most senior staff, the impact is being felt
at operational levels as CEOs require statements from managers and others
verifying data from their units. Section 404, which deals with the evaluation
of internal controls, has also increased communication. Audit committees
are requesting periodic status briefings from management. Similarly, external
auditors and the audit committee are engaging in more frequent and open
discussions as required by section 204. One change that Cook noted was
the participation of CEOs in audit committee meetings, something he did
not see often prior to the passage of this landmark legislation.
Audit Committees and Compliance
Audit committees have taken on new stature under S-O. Section 202 calls
for the audit committee to pre-approve all services provided by an auditor.
As Cook noted, this is true no matter how small the commitment of time.
Section 202 also requires that companies keep track of auditing services,
which has created a need for internal controls for these services. "This
is a big deal," said Cook. While such paperwork might seem simply
bureaucratic in character, crossing the line can require an auditing firm
to resign as an auditor.
Section 404 has also pushed companies to invest in tools and to rethink
methodologies, causing, according to Cook, "a lot of work for our
clients." He used Whirlpool as an example, noting that the company
has a team of a "a couple of dozen" people working on S-O compliance
with additional work from people not directly on the compliance team.
Whirlpool has also acquired software to help them accomplish their goals.
"A lot of people did not understand the significance of this section,"
said Cook. "It is an ongoing exercise to meet the requirements."
He noted that the evaluation of internal controls is an opportunity to
improve systems and procedures.
Cook pointed out an aspect of S-O that has changed employment opportunities
for the students attending the presentation. Section 201 of the legislation
spells out certain services that auditors are prohibited from providing
to their clients. For companies where Ernst & Young is providing auditing
services, the company cannot also provide such services as financial information
systems design and implementation, management functions, actuarial services,
or investment banking systems. The E&Y clients need to look elsewhere
for those types of services, creating opportunities for other accounting
firms. These so-called second service providers for non-audit related
functions will provide job opportunities in the coming years for recent
About the Speaker
Jim Cook is a partner with Ernst & Young, LLP
where he serves as global director of retail and consumer products and
Americas director of industries. He has 32 years of experince and has
worked with a wide range of clients including Whirlpool, McDonald's, and
S.C. Johnson and Son.
Cook is a 1971 graduate of the College of Business with a BS in accountancy.
He is an active member of the Executive Committee of the Dean's Business
Council and is a past president of the College of Business Alumni Association.
Other charitable and non-profit organizations have benefited from his
time and talents, including the Chicago-Greater Illinois chapter of the
National Multiple Sclerosis Society.